Stocks fall after Fed decision to buy bonds

After a day of anticipation, investors got the news from the Federal Reserve they were waiting for. They didn’t like it.

Stocks fell sharply after the Fed said it will buy long-term Treasurys and sell short-term ones to help the economy regain momentum. However, the major stock indexes were fluctuating — a typical reaction to any big move by the Fed.

At 2:52, the Dow Jones industrial average had fallen 86, or 0.8 percent, to 11,322. The Standard & Poor’s 500 fell 11, or 0.9 percent, to 1,190. The Nasdaq composite rose 2, or 0.1 percent, to 2,592.

The central bank met for two days to discuss the weakening economy and what to do about it. After the meeting, it said it would buy $400 billion in 6-year to 30-year Treasurys by June 2012. Over the same period, it planned to sell $400 billion of Treasurys maturing in 3 years or less. That should drive down interest rates on long-term debt, and could lower rates on mortgages and other loans.

The central bank’s policy has been dubbed “Operation Twist” because it is designed to “twist” long-term rates relative to shorter ones. It also recalls a similar program in the early 1960s, when the twist was the rage on dance floors.

There were few, if any, surprises in the Fed’s announcement. This is the third major bond-buying program by the Fed in less than three years. The market’s reaction showed that investors are skeptical about this program’s chances of turning the economy around.

“None of the enacted policies have done anything to spur this growth and I’m not sure the Fed can do (much),” said Michael Sansoterra, a portfolio manager at Silvant Capital Management.

In its statement, the Fed said the economy has “significant downside risks.” One of those risks is the volatility in financial markets around the world.

The International Monetary Fund said Wednesday the global financial system is in its most vulnerable state since the 2008 financial crisis. In a semi-annual report, the IMF said the risk to banks and financial markets has grown in recent months.